On Mar 27, 2015, Zacks Investment Research downgraded Southwest Airlines Co. LUV by a notch to a Zacks Rank #3 (Hold).
The airline industry is highly regulated, particularly by the federal government. All airlines in the U.S. are subject to regulations implemented by the Department of Transportation (DoT). Earlier, Dot had levied a heavy $1.6 million fine on the carrier for violating rules pertaining to tarmac delay.
Recently, Southwest Airlines signed a four-year employee-friendly deal with its customer service agents and customer representatives. The new agreement is aimed at improving employee welfare by including provisions for pay raise and performance-related bonus payments. Hence, signing of such deals in the future will further drive operating expenses.
Further, Southwest Airlines faces competition from low-cost carriers as well as major airlines that cut fares in order to attract customers. Also, fuel price volatility continues to be one of the potent challenges. Meanwhile, mounting debts coupled with rising capital expenditure related to fleet restructuring may hurt the carrier’s growth prospects.
In spite of the odds, Southwest Airlines has reported strong air traffic numbers for the last two months mainly supported by significant travel demand during the holiday season.
Stocks to Consider
Better-ranked stocks in the same sector are JetBlue Airways Corp. JBLU, Allegiant Travel Company ALGT and Hawaiian Holdings Inc. HA. JetBlue Airways sports a Zacks Rank #1 (Strong Buy) while Allegiant Travel and Hawaiian Holdings carry a Zacks Rank #2 (Buy).
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